U.S. economists see long-term ills from Iraq war

By Richard Cowan - Analysis

WASHINGTON (Reuters) - What's over $100 billion a year in Iraq war costs to a $14 trillion U.S. economy? Not much now, but the tab is growing on a "buy-now-pay-later" plan that threatens long-term problems.

Money was not much of an issue five years ago when President George W. Bush led the country into war in Iraq. Instead, all eyes were on allegations, later proven unfounded, that then-Iraqi President Saddam Hussein had weapons of mass destruction and could use them against the United States.

But $500 billion later, experts worry about the impact on the world's biggest economy, already facing a crippling housing crisis.

"The short-term economic consequences of the war have been manageable and modest. But the long-term consequences will be substantial," said Mark Zandi, chief economist of Moody's Economy.com.

Much of the problem, economists say, is that every month of combat adds more than $10 billion to a U.S. debt that now tops $9 trillion.

"Extra government debt is undoubtedly a bad thing for our economic performance in the long run," said Doug Elmendorf, senior fellow at the Brookings Institution and a former economist for the Federal Reserve Board.

Other expenses -- such as health care costs for the poor and a new prescription drug plan for the elderly -- combine to increase the government's debt at a much faster rate than the Iraq war, Elmendorf noted.

'STOP DIGGING'

"The rule when one is in a hole is to stop digging," Elmendorf said of debt and war costs.

Robert Reischauer, head of the Urban Institute and a former director of the Congressional Budget Office, said the benefits of war spending for the U.S. economy had been "muted" because so much of the money is spent on goods and services abroad. That, he said, was "stimulating economies elsewhere, not the least being the economies of Iraq, Kuwait and Saudi Arabia."

War backers would point out that failing to secure the United States after the September 11 attacks would have a severe impact on economic well-being, he said.

"If one thinks this war is very important for our national security, then ultimately, it is important for our economic success as well," Elmendorf said, adding that "if it was, it was also worth paying for" it instead of borrowing.

At some point, government debt comes due and the Treasury Department either must pay it off or roll it over and pay more interest, just like a family facing monthly credit card bills.

Higher government borrowing also could push up interest rates, making it more expensive for consumers to borrow for home mortgages and businesses to finance investments.

In early 2003, it seemed a remote possibility that the U.S.-led invasion could create economic problems at home.